The Trap We Are In

[Kurt_and_Hunter]

August 30, 2010, 4:16 pm
The Trap We’re In (Wonkish)
Paul Krugman

. . .

the Fed funds rate should be something like minus 5 or 6 right now, but you can’t do that, so we’re stuck with an interest rate that’s too high given low inflation and very high unemployment.

The crucial thing to understand about this position is that it’s not self-correcting. On the contrary, as inflation falls over time and possibly goes to actual deflation, we sink deeper into the trap. That’s why the Fed’s wait-and-see policy is so wrong-headed: to the extent that the Fed thinks it can use unconventional measures to get some traction, it should use them now now now, not wait until expectations of below-target inflation have gotten embedded.

It’s also why fiscal policy should have been much more aggressive than it was; even aside from the political dynamics, which said that we’d only get one shot, the economic dynamics also said that not doing enough early on only makes an eventual solution harder.

The sad thing is that policy makers were supposed to know all this. The Fed had studied Japan extensively, and believed that the Bank of Japan could have averted the lost decade if it had reacted very aggressively early on. Larry Summers talked about a Powell doctrine of overwhelming force in the face of crisis. And yet what we actually got was an underpowered response on both the fiscal and the monetary fronts.

. . .

http://krugman.blogs.nytimes.com/2010/08/30/the-trap-were-in-wonkish/

[DJ13]

1. There are times I think this crisis was orchestrated to lower our standard of living

Though they mistimed it and it started before Bush was out of office.

Even the half hearted response to fixing it is consistent with the notion it was an intentional act.

[Subdivisions]

3. That's exactly what happened. Anyone who thinks this was not

an orchestrated plan to lower our standard of living is living in a dream world. I wish I was living there with them.

[OHdem10]

13. Eactly, times two. Globalization is harmonizing the living standards

around the world. Our Living standards are being lowered
so we can compete around the world.

Our Leaders so loved this nation that they refused to negotiate
trade policies that were fair. Instead of bringing lower standards
up to meet ours, they are lowering our living standards to meet
the rest of the world.

We are in a Globalization Crisis. This is why the GOP and
their taxcuts will not work. This is not some business cycle
bust. The Bankster set it off. Businesses have laid
off people because they know the living standards are going
to be lower, therefore they will not have as many customers
in the future. They have adjusted to meet their needs.
The Corporations continue to send jobs out of the country
Congress continues to hand out H-1b visas. What is wrong
with this picture.

The Democrats are now in trouble because they listened to the
DLC, Blue Dogs and Republicans. The initial stimulus was
not large enough. Thank the Deficit Hawks.

[Barack2theFuture]

7. [phone]

[valerief]

9. That's it. And why would they want to do that? So we won't expect what we've been promised from the

govt.

[rucky]

12. I think that all the time.

Cheap labor. Welching on pensions & raiding what's left of 'em. That's the GOP platform.

[Mojorabbit]

16. I think it was too

and watching the end of suburbia tonight wonder at how well it cut the demand for oil which would delay peaking if we were ready to get to a crisis point.

[MannyGoldstein]

2. Krugman should be Secretary of Treasury

Or head economic advisor.

Too bad the Adminstration treats him like a leper.

[Hawkowl]

4. +100

The administration has really, really dug itself a deep hole. We need more than fiscal stimulus and hope that Wall Street will change its ways. We can't depend on private investment--unless it's in China.

We need an industrial policy. A policy that penalizes instead of rewards companies for offshoring and tax avoidance. Unfortunately, Obama is not going to institute any such thing and he will not gain a second term once everyone and his uncle start calling the Great Recession, Great Depression II.

I've been saying from the first few months of his administration that Obama most closely resembles Herbert Hoover in his intellect, attitude, and policy choices.

[MannyGoldstein]

11. Here's an excellent article that you might like

Published a year ago in Harpers: http://www.harpers.org/archive/2009/07/0082562">Barack Hoover Obama: The best and the brightest blow it again

[Hawkowl]

17. Thanks! I knew I wasn't the only one thinking this.

[Riftaxe]

5. Apparently the administration isn't as into

free trade treaties such as NAFTA as much as you and Krugman.

[SlipperySlope]

6. (self-deleted)

(self-deleted)

[Sparkly]

10. You took the words out of my keyboard.

Precisely.

[SlipperySlope]

8. Krugman and Bernanke both miss the whole point of Japan

Bernanke thought the lesson from Japan was that is you acted aggressively enough you could avoid a lost decade. Krugman is saying that Bernanke, despite taking unprecedented steps, didn't act aggressively enough.

They are both missing the flipping point. What happened in Japan is that policymakers refused to make banks eat their losses. The banks carried real estate and loans on their books at inflated 1980s values, refusing to take the losses that true valuations would require. No doubt they refused true valuations because that would have revealed them for what they were - bankrupt.

The exact same mistake is being made here. It does not matter how much flipping stimulus Bernanke or Giethner or Krugman pumps into the system. The stimulus cannot turn the economy around because the banks here are not recognizing their losses. Until they are forced to to that, all the stimulus is just going to get flushed into a vacuum.

Yes, targeted stimulus can bring relief to people who are suffering, but it cannot turn the economy around. We need a true mark-to-market (not mark-to-unicorn-and-fairy-model) accounting, we need the banks to take their losses, and then we can rebuild from there.

[ipaint]

14. +1000

It's going to come down one way or another. Massive fraud and criminal activity. It's not just here in the states either. Once we go it will be dominoes.

The government knows, William Black clearly told them-

Bill Black's eye-popping opening statement at House FinServ hearing on Lehman Bros.

http://www.youtube.com/watch?v=3-HTylLzXu8


"..and we now have sociopaths in control of our financial institution, and as you said important levers of our government as well." - william black

[ipaint]

15. A trillion dollars in losses that the Obama administration is allowing the banks to cover up

while pocketing billions of taxpayer dollars in salaries and bonuses. Total lawlessness and fraud.

To rob a country, own a bank

http://www.youtube.com/watch?v=sA_MkJB84VA&feature=related

We can pump all the stimulus money into the economy we want, until these banks are taken down, split up and then regulated properly there will be no recovery in fact things will get progressively worse.

Certainly stimulus money should help workers not starve and keep a roof over their heads but the banks must be held accountable before we can actually dig ourselves out of this mess.

[RandomThoughts]

18. Yea.

It is pretty obvious.

[upi402]

19. We elected Obama. He appointed banksters.

Now we're in another new and improved trap.

Well, seems to me we would need a choice that gave us change. We got pretty words and the same ass raping. There's a trap.